Investing.com -- Moody’s Ratings has downgraded the corporate family rating (CFR) of MaxLinear, Inc. (NASDAQ: MXL ) to B3 from B1, while changing the outlook from negative to stable. The downgrade also extends to MaxLinear’s senior secured first lien credit facilities, which include the revolver due in June 2026 and Term Loan B due in June 2028, both of which were downgraded to B3 from B1. The Speculative Grade Liquidity Rating remains at SGL-3.

The downgrade reflects MaxLinear’s disappointing financial performance and the expectation of continued weak EBITDA margins and leverage metrics over the next 12 to 18 months. Despite the completion of the inventory clearing process in MaxLinear’s end markets, Moody’s anticipates only a modest recovery in the same period. The cost-cutting measures implemented by MaxLinear in 2024 are expected to generate free cash flow in the upcoming quarters as revenues increase and profitability improves.

The B3 CFR is indicative of MaxLinear’s decreased revenues and profitability, with quarterly revenues down nearly 27% year over year and a 68% decrease since 2022. MaxLinear’s concentrated end market exposure has contributed to this volatility. However, Moody’s expects free cash flow to gradually improve during 2025 as customer inventories are now largely balanced, which should provide for a revenue recovery in 2025 and 2026.

MaxLinear’s large cash balance and outsourced manufacturing model, which limits capital spending needs, are beneficial to the company. Despite the current revenue depression, MaxLinear has been able to maintain high gross margins due to its valuable intellectual property and niche market positions in radio frequency chips used in home networking, wireless infrastructure, and data center systems.

MaxLinear has been involved in an arbitration initiated by Silicon Motion Technology Corp. (NASDAQ: SIMO ) since October 2023, following MaxLinear’s termination of its agreement to acquire Silicon Motion. Silicon Motion is seeking payment of the $160 million acquisition termination fee plus damages. A substantial cash payment to Silicon Motion, if Silicon Motion prevails in the arbitration, would put pressure on MaxLinear’s B3 CFR.

The stable outlook is based on the expectation of a modest recovery in revenues from the currently depressed level over the next 12 to 18 months. The outlook also considers the risk that the Silicon Motion arbitration could require MaxLinear to make a settlement payment to Silicon Motion. While the potential settlement payment timing and magnitude is unknown, MaxLinear has some capacity to address this due to the large cash balance ($118.6 million as of December 31, 2024), which is expected to grow over the coming quarters due to increasing cash generation.

The SGL-3 rating reflects MaxLinear’s adequate liquidity, incorporating the potential for a moderately negative outcome of the Silicon Motion arbitration. Liquidity is supported by a large cash balance ($118.6 million at December 31, 2024). It is expected that MaxLinear will generate annual free cash flow of at least $20 million over the next 12 to 18 months.

Given MaxLinear’s large cash balance and improving free cash flow, it is not expected that MaxLinear will need to draw on the $100 million Revolver, assuming a negative outcome on the Silicon Motion arbitration is avoided. The Term Loan is not subject to any financial maintenance covenants. However, the Revolver contains a springing financial covenant set at 3.5x debt to EBITDA, which is tested at Revolver utilization in excess of just 1% of total commitments.

The Term Loan and the Revolver are both rated B3, reflecting the single class of debt in the capital structure. These debt instruments benefit from the collateral, which is comprised of a first priority lien on the company’s assets.

An upgrade in the rating is unlikely in the near term due to the uncertain outcome of the Silicon Motion arbitration. However, assuming successful resolution of the arbitration, the rating could be upgraded if MaxLinear profitably increases scale and diversity. Conversely, the ratings could be downgraded if Silicon Motion is awarded a large settlement upon conclusion of the arbitration, or if MaxLinear’s revenues and profitability further weaken.

MaxLinear, Inc. is a fabless semiconductor firm that produces radiofrequency (RF) and mixed-signal integrated circuits used in broadband communications, data centers, and metro and long-haul data transport network applications.

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